The blog discusses Apple's response to the EU's Digital Markets Act (DMA), which aims to regulate large tech companies like Apple. Apple's proposal to comply with the Act involves allowing alternative app stores and third-party payment systems but still requires developers to pay significant fees. This has led to accusations of "malicious compliance" and presents a dilemma for the European Commission. Approving Apple's proposal could disadvantage EU developers compared to international counterparts, while penalizing Apple might result in prolonged litigation. The situation highlights the need for nations considering similar regulations to carefully balance stakeholder incentives to avoid market failures and support innovation.
From March 7, 2024, large technology companies designated as “gatekeepers”[1] under the Digital Markets Act, an EU legislation that seeks to make digital markets more open and contestable, will have to show compliance with the Act’s numerous obligations. In the lead-up to this implementation deadline, gatekeepers designated under the Act, including Apple, Meta, Microsoft, and Google, have released proposals on how they plan to comply with its obligations. Apple’s proposals, announced on February 25, 2024, have sparked much debate on the efficacy of ex-ante antitrust regulations, such as the DMA.
Apple’s DMA compliance proposal primarily relates to Articles 5(7) and 6(4) of the DMA. Article 5(7) prohibits gatekeepers from requiring developers or business users to use their proprietary payment services for in-app purchases.[2] Article 6(4) requires gatekeeper platforms to allow third-party applications to be downloaded directly from the web (sideloading) or alternative software application stores.[3] Currently, developers providing applications on Apple devices can only distribute their applications to iOS users through the App Store, Apple’s application marketplace. Apple charges commissions, ranging from 15 to 30 percent, on digital goods and services developers sell to users through the App Store. It ensures that such commissions are paid to it by mandating the use of its own payment systems for in-app purchases. As such, the DMA seeks to break Apple’s control of app distribution on iOS and allow developers to explore alternative and possibly cheaper avenues to get their applications to end users.[4]
Apple’s proposal seemingly complies with Article 5(7) and Article 6(4). Indeed, the proposal states that Apple will allow users to download and utilize third-party application stores on iOS. It also states that developers who opt to use such third-party stores will not have to pay any commissions to Apple on in-app purchases. Additionally, developers who choose to distribute their apps through the App Store will no longer be confined to Apple’s own payment service and will have the option to choose an alternate payment provider.[5]
However, a closer reading reveals that setting up alternative app stores will be costly, and developers may pay higher fees than they do under the current system, as discussed below. Thus, while the DMA seeks to democratize digital markets, its implementation may inadvertently disadvantage smaller players, potentially leading to a less diverse and innovative app ecosystem. Under Apple’s proposal, setting up an alternative app store on iOS will be an expensive endeavor. Apple requires any entity seeking to set up such an app store to provide it with a $1 million letter of credit. The letter of credit is intended to ensure that the entity setting up an alternative store has the means to support developers and customers.[6] However, this requirement will make it virtually impossible for smaller entities to set up stores to distribute their own apps.[7]
Moreover, developers who opt to move away from the current system of app distribution and payments will have broadly two options:
a) Distribute apps on the App Store using an alternate payment method and pay a 10-17% commission to Apple on in-app purchases plus a “core technology fee” (CTF) of 0.50 Euros for each download after 1 million downloads. Apple justifies the CTF as remuneration for the investment it makes in the tools, technology, and services that enable developers to build and share their apps with Apple users.[8]
b) Distribute apps using an alternative app store and pay a CTF on all app downloads.
While Apple argues that the new app store terms would result in 99 percent of developers reducing or maintaining the commission they pay the company[9], several experts note that opting for the new terms may result in developers paying millions of dollars to Apple for app downloads. For instance, David Heinemier Hansson, the creator of RubyonRails - a web application development language, estimates that if Meta opts for the new business terms, it will end up paying Apple more than $11 million annually in CTF alone.[10] Similarly, the developer of a free app with more than 2 million downloads would have to pay approximately $45,000 in CTF, even though the app generates no revenue.[11] The above concerns have caused several companies and developers, including Spotify and Epic, both of which are embroiled in legal battles with Apple regarding its App Store policies, to label the proposals as “malicious compliance” and a rejection of the DMA’s goals.[12]
Despite the above accusations, it can be argued that Apple’s proposal complies with the language of the DMA. Indeed, the proposed changes “allow and technically enable the installation and effective use of third-party software applications or software application stores” as required by Article 6(4). Similarly, Apple has committed to not requiring end users or business users to use or interoperate with its own payment systems, as stipulated by Article 5(7).[13]
Much will now depend on how the European Commission views Apple’s compliance proposal. If it deems the proposal compliant with the DMA, it could result in several EU developers being rendered worse off than their counterparts in other countries. However, if it finds that Apple has failed to comply with the DMA, it could impose fines of up to 10% of the company’s global turnover. Such fines by the EC will likely be challenged by Apple before the European Court of Justice, culminating in litigation proceedings spanning several years.[14] Illustratively, Apple has already challenged the decision to designate the App Store, iOS operating system, and Safari web browser as core platform services under the DMA.[15]
Whatever the outcome in the EU, Apple’s plan to comply with DMA provides a valuable lesson for nations, such as India, considering ex-ante antitrust laws for their digital markets. Unless these laws account for the incentives of all stakeholders, including large technology companies, developers, and users, they will likely result in market failure. Nations should instead promote growth and innovation in their domestic technology ecosystems, thereby providing citizens with meaningful alternatives to the services offered by large technology companies.
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[1] Gatekeepers are digital platforms that provide an important gateway between businesses and users, resulting in a singificant impact on the European internal market.
[2] https://www.eu-digital-markets-act.com/Digital_Markets_Act_Article_5.html
[3] https://www.eu-digital-markets-act.com/Digital_Markets_Act_Article_6.html
[4] https://mobiledevmemo.com/apple-to-developers-heads-i-win-tails-you-lose-part-3/
[8] https://developer.apple.com/support/dma-and-apps-in-the-eu/#faq
[10] https://world.hey.com/dhh/apple-s-new-extortion-regime-to-keep-big-app-makers-d4d03ea9
[11] https://mastodon.social/@stroughtonsmith/111818345294643786
[12] https://www.theverge.com/24051818/apple-app-store-dma-eu-developer-response
[14] Ibid.